With the creation of the new Department of Business, Energy and Industrial Strategy (BEIS), the new Prime Minister Theresa May kick-started a debate on how the Government should view and manage UK plc.
A national 'industrial strategy' was a key pillar of government policy throughout post-war Britain until Margaret Thatcher effectively outlawed the phrase in Conservative circles, and indeed the national dialogue, in the search for market liberalisation and competition. This coincided with the beginning of the decline of manufacturing in the UK. Between 1980 and 2010, the UK manufacturing and production sector, as a total percentage of GDP, declined from 45% to below 20%, with cities such as Birmingham, Sheffield and Sunderland diminishing in the face of international competition and falling global prices. Whether the two are related is still hotly disputed to this day.
In recent years, various industrial strategies for individual economic sectors have been put forward by Government. However, it wasn’t until Britain’s second female Prime Minister, in a clear rejection of the policy of the first, that the concept of a fully formed industrial strategy got its renaissance. In a statement on the 18 July, as part of the announcement to merge BIS and DECC, Theresa May stated: “The new department will be responsible for helping to ensure that the economy grows strongly in all parts of the country, based on a robust industrial strategy”.
Reflecting general intrigue at this new direction, the BIS Select Committee has now launched an inquiry into the remit and scope of the 'industrial strategy.' The Government's own definition of industrial strategy is yet to be revealed, but early signs suggest that it will include the ability to block takeovers in strategically important sectors, which could have a negative impact on the UK’s Foreign Direct Investment (FDI). It could also intervene, or set up further support frameworks for entrepreneurs to help commercialise products and ideas.
We look at what the Prime Minister is trying to gain by [re-]introducing an industrial strategy, and what it means for UK policy.
- The Politics: Theresa May has seen an opportunity to appeal to demographics in ex-industrial centres following Brexit who have previously voted for Labour and UKIP.
- The Geography: The creation of BEIS offers the chance to re-balance the discussion away from the ‘Northern Powerhouse’ and include regions such as the Midlands as well as Wales and NI.
- State Intervention: There will be a huge row over the appropriate level, and mechanisms for, state intervention, but the Prime Minister has indicated a willingness to explore the issue.
- The Priorities: The Government will take both a vertical and horizontal approach to the industrial strategy. Pushing through key projects whilst expanding labour skills and UK supply chains.
The result of the UK referendum in June revealed a clear divide in the electorate. Regions which voted to leave the EU were predominantly located in the industrial heartlands that are mostly considered to have lost out to globalisation and the growth of the services sector. These heartlands, once Labour strongholds, have been targeted by UKIP which proved crucial in the recent vote.
Now that the UK is indeed leaving the EU, Theresa May has seen a chance for the Conservatives to regain UKIP voters (whose sole policy aim for the UK to leave the EU is diminishing in light of the 'brexit' vote) and undercut Labour by taking their heartlands. An industrial strategy is a would-be pitch to those Labour and UKIP voters, if it is seen as directly benefitting their regions and employment prospects.
This smash-and-grab for voters who previously might not have considered themselves natural Conservatives, but who feel let down by previous governments, also taps perfectly into the difficulties that the Labour Party currently find itself in.
George Osborne’s “Northern Powerhouse” has been discreetly dropped over the last few weeks. It has been replaced by a vision to rebalance and “build an economy that works for everyone”. The 2013 Coalition Industrial Strategy: government and industry in partnership laid some important groundwork in this area but May clearly thinks it needs to go further.
The focus on the “Northern Powerhouse” ignored the growing importance of industries in Wales and the South West – especially in clean energy through nuclear or tidal lagoon developments – or the need for much needed broadband infrastructure in Northern Ireland which could help boost their economy.
A more geographically balanced focus from BEIS has been broadly welcomed and allows greater flexibility for the Government to deliver the required investment to regions, sectors and industries that can best support local growth and long-term targets.
Engaging with communities, businesses, advocacy groups and industry workers is key to the success of a new industrial strategy. This is another reminder that business must seize opportunities in the post-Brexit landscape to work with government. This in turn can help generate FDI, such as the recent £1bn Sheffield-Sichuan Guodong Construction deal into areas where commercial advantages and ready-made labour forces are located. Be it in offshore wind development in the Humber region, the start-up expertise of Manchester, or the burgeoning tech-hub and car manufacturing heritage of Sunderland.
The free market approach to industrial strategy over the last few decades led to a monumental shift in the UKs economic make-up. It helped cultivate the UK as one of the leading EU nations in terms of attracting foreign direct investment (FDI). In 2013, the UK attracted £37bn worth of FDI compared to only £2bn in 1987. That presently makes us eleventh in the world, and second behind Spain (£39bn) of EU member states.
Recent industrial strategy – such as it was – focused on cultivating a regulatory regime designed to enhance competition, letting market forces decide industry “winners”. This did not support the UK’s manufacturing sector which has now been largely replaced by a flourishing services sector. It remains to be seen whether a refreshed approach will seek to offer more protectionist support to vulnerable industries, a move that would be criticised as many as a shift to "picking losers not winners". Those who see nuclear as the answer to our climate change challenge will have been dismayed by the postponement of the Hinkley Point C announcement due to security fears over the Chinese involvement. This is another demonstration of new, more interventionist instincts.
The UK’s world class research facilities have also failed to commercialise homegrown innovative products. Many have had to find funding or support frameworks abroad, mainly in the US. This is slowly changing. However, as the recent acquisition of Arm – the jewel of the UK tech centre – by Japan’s Softbank for $24bn shows, our ability to nurture our leading, and strategically important industries, is limited.
Greg Clark, the Secretary of State for BEIS, technically has a remit to look into any future take-overs like this. If Pfizer comes back with a better offer for AstraZeneca (following the 2015 takeover attempt), BEIS would be inclined to review it. Currently, the Government has no power to block a bid. But by placing the industrial strategy at the heart of a new department and creating a Cabinet Committee on Economy and Industrial Strategy, Theresa May is showing a willingness to change this approach.
Horizontal and vertical priorities
This industrial reset also needs to define its reach if it is going to succeed. Will it have a vertical or horizontal focus, or aim to cover both?
A horizontally focused industrial strategy would follow on the work of the coalition in increasing / supporting the role of apprenticeships; strengthen the role of the LEPs in developing their own industrial road-maps; freeing up financial mechanisms for projects that fall under the industrial strategy banner; and ensure local supply chains can compete on a level-playing field with larger construction firms.
A vertically focused industrial strategy could cherry pick the sectors or projects which are viewed as strategically important to the UK. BEIS could prioritise projects such as new energy infrastructure, the roll out of 4G broadband, affordable housing developments, or strengthening the UK transport network. All of these could deliver impetus to the economy and support the horizontal work (labour skills and supply chains) which already exist.
It is likely that there will be a mixture of both.
Another key unresolved question that is raised by a new industrial strategy is how to balance growth with the environmental impact. On the one hand, the appointment of Nick Hurd as Minister for Climate Change assumes that meeting climate targets will be a central issue for BEIS, cross-cutting across every project and decision they make. On the other, the dissolution of DECC and integration into BIS shows that ‘business comes first’. Marrying growth and the environmental impact will be vital when judging the success of the strategy in the future.
A new clearly defined industrial strategy would be welcome news if it opens up doors previously closed off by Cameron and Osborne. May has given her Cabinet the flexibility to boost the UK economy through strategically important infrastructure projects. However, fiscal discipline will remain a cornerstone of Government policy and only developments which offer the most ‘bang-for-buck’ return will be pursued.
The good news is that the Government has an array of projects in the pipeline, such as HS2, Crossrail 2, Thames Tidal Tunnel, Airport Expansion, Tidal Lagoons and new nuclear plant, which are the envy of other nations. Although you could also argue that we only have such wealth because we should have long made a decision on all of these before now. Each could have positive repercussions for the UK economy as a whole. The bad news is that the politics, which initially delayed these projects have not disappeared, and may prove harder to surmount for a new Cabinet already planning for the 2020 election.
When Parliament returns in September, expect 'industrial strategy' to be at the heart of new government announcements. How these are received will give the first insights into whether it will play a defining role in how we judge Theresa May’s premiership.